In an NYT column advocating that companies spend more money on training their workers, former Yale president Richard Levin implicitly endorsed the Republicans’ view that the economy will grow much more rapidly than projected by the Congressional Budget Office and most other forecasters. Levin bases his argument in part on an evaluation by McKinsey, a management consulting company, that up to half of all jobs could be automated over the next two decades.
If we do in fact see half of all current jobs eliminated, that would imply 3.5 percent annual productivity growth, a little better than the 3.0 percent rates we saw in the long Golden Age from 1947 to 1973 and again from 1995 to 2005. With even modest labor force growth, we would be looking at GDP growth of more than 4.0 percent. Even if the McKinsey numbers turn out to be overly optimistic on the rate of productivity growth, we should still be able to make the 3.0 percent GDP growth rate touted by the Republicans.
Of course this growth has nothing to do with the Republican tax cut, the McKinsey projections long predate Trump’s election. But they do indicate that the prospect of 3.0 percent growth is not absurd, many respectable types use this sort of assumption as the basis for their NYT columns.
In an NYT column advocating that companies spend more money on training their workers, former Yale president Richard Levin implicitly endorsed the Republicans’ view that the economy will grow much more rapidly than projected by the Congressional Budget Office and most other forecasters. Levin bases his argument in part on an evaluation by McKinsey, a management consulting company, that up to half of all jobs could be automated over the next two decades.
If we do in fact see half of all current jobs eliminated, that would imply 3.5 percent annual productivity growth, a little better than the 3.0 percent rates we saw in the long Golden Age from 1947 to 1973 and again from 1995 to 2005. With even modest labor force growth, we would be looking at GDP growth of more than 4.0 percent. Even if the McKinsey numbers turn out to be overly optimistic on the rate of productivity growth, we should still be able to make the 3.0 percent GDP growth rate touted by the Republicans.
Of course this growth has nothing to do with the Republican tax cut, the McKinsey projections long predate Trump’s election. But they do indicate that the prospect of 3.0 percent growth is not absurd, many respectable types use this sort of assumption as the basis for their NYT columns.
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Hi everyone, this is CEPR, taking over Beat the Press for an important announcement. We’re planning a party in honor of Dean’s 18 years as CEPR’s Co-Director and we’d love for you to come. February 26, 2018, Busboys and Poets 5th and K location, in Washington, DC.
Details can be found here.
Hope to see you there! Now, back to your regularly scheduled programming.
Hi everyone, this is CEPR, taking over Beat the Press for an important announcement. We’re planning a party in honor of Dean’s 18 years as CEPR’s Co-Director and we’d love for you to come. February 26, 2018, Busboys and Poets 5th and K location, in Washington, DC.
Details can be found here.
Hope to see you there! Now, back to your regularly scheduled programming.
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NYT Magazine had an interesting piece on the experience of a woman and her family who were forced out of the Cabrini-Green housing project in Chicago when it was torn down in 2010. The article tells readers that she was unhappy to be forced to leave an apartment that had been her home for more than two decades and where she had raised 13 children. The experience of her and her family in the public housing to which they were relocated proved disastrous, and she ended up dying a seemingly preventable death less than four years later.
While the story presented here is, in fact, tragic, the piece misleadingly implies that Cabrini-Green residents were better off before the high-rise complex was destroyed. This may have been true for some, but that is not likely the case for most of the people who left the project.
A recent re-analysis of data from the “Moving to Opportunity” study conducted in the 1990s found large improvement in school graduation rates and other outcomes for children who left housing in areas of high poverty. A more recent analysis, of outcomes for people who left public housing when the Robert Taylor homes on Chicago’s south side were destroyed, found even larger effects.
The story of Annie Ricks, the woman featured in the NYT piece, is indeed horrible. It reflects the way low-income people, and especially low-income black people, are treated in the United States. But it is absurd to imply that housing projects like Cabrini-Green were somehow good living arrangements for people. This doesn’t mean that at least some of the former residents would not find these projects better than their alternatives, but it is irresponsible to suggest that, in general, this is the case when there is clear evidence showing the opposite.
NYT Magazine had an interesting piece on the experience of a woman and her family who were forced out of the Cabrini-Green housing project in Chicago when it was torn down in 2010. The article tells readers that she was unhappy to be forced to leave an apartment that had been her home for more than two decades and where she had raised 13 children. The experience of her and her family in the public housing to which they were relocated proved disastrous, and she ended up dying a seemingly preventable death less than four years later.
While the story presented here is, in fact, tragic, the piece misleadingly implies that Cabrini-Green residents were better off before the high-rise complex was destroyed. This may have been true for some, but that is not likely the case for most of the people who left the project.
A recent re-analysis of data from the “Moving to Opportunity” study conducted in the 1990s found large improvement in school graduation rates and other outcomes for children who left housing in areas of high poverty. A more recent analysis, of outcomes for people who left public housing when the Robert Taylor homes on Chicago’s south side were destroyed, found even larger effects.
The story of Annie Ricks, the woman featured in the NYT piece, is indeed horrible. It reflects the way low-income people, and especially low-income black people, are treated in the United States. But it is absurd to imply that housing projects like Cabrini-Green were somehow good living arrangements for people. This doesn’t mean that at least some of the former residents would not find these projects better than their alternatives, but it is irresponsible to suggest that, in general, this is the case when there is clear evidence showing the opposite.
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Yes, boys and girls, it’s time to play “Why Did the Market Fall?” This is when you get to blame who or whatever you like for the big plunge in the market that began last Friday (now largely reversed).
I want to blame the partial unwinding of the Affordable Care Act, which is likely to leave millions more uninsured and tens of millions paying more for their health care. I have a friend who wants to blame her uncle’s bad breath. Then there is Andrew Sorkin at the NYT who tells us that investors fear that Donald Trump’s tax cuts will succeed all too well, causing a boom which will generate inflation.
So the Sorkin story is that we get a big uptick in demand from the tax cuts, which will push the economy above its potential level of output creating a good old-fashioned wage-price spiral. That will mean higher interest rates and therefore lower stock prices.
If we want to test this one we can look at measures of investors’ expectations of inflation. On January 31, just before the plunge, the yield on 10-year Treasury bonds was 2.72 percent. The yield on an inflation-indexed 10-year bond was 0.61 percent, implying a gap of 2.11 percentage points. On Friday, the day of the first big plunge, the yield on the 10-year Treasury bond rose to 2.84 percent, while the yield on the inflation-indexed bond rose to 0.7 percent, giving a gap of 2.14 percentage points.
That’s 0.03 percentage points more than before the crash. Do we really want to say that an increase in the expected rate of inflation of 0.03 percentage points will sink the market? Of course, the gap was back down to 2.10 percentage points at the end of the day on Monday, so it’s not clear what happened to investors’ fears that the Trump tax cuts would spur inflation.
Okay, we get that Sorkin is apparently very fearful of inflation and presumably thinks the Fed has to be very vigilant on the inflation watch. He doesn’t even care if he lacks the evidence to make his case.
(It is worth noting that if the Trump tax cuts “work” it is supposed to be by spurring a flood of new investment. That should increase productivity growth, which would relieve inflationary pressures. So if Sorkin has a vision of Trump’s tax cuts causing inflation, he seems them “working” in a different way than has been advertised.)
Yes, boys and girls, it’s time to play “Why Did the Market Fall?” This is when you get to blame who or whatever you like for the big plunge in the market that began last Friday (now largely reversed).
I want to blame the partial unwinding of the Affordable Care Act, which is likely to leave millions more uninsured and tens of millions paying more for their health care. I have a friend who wants to blame her uncle’s bad breath. Then there is Andrew Sorkin at the NYT who tells us that investors fear that Donald Trump’s tax cuts will succeed all too well, causing a boom which will generate inflation.
So the Sorkin story is that we get a big uptick in demand from the tax cuts, which will push the economy above its potential level of output creating a good old-fashioned wage-price spiral. That will mean higher interest rates and therefore lower stock prices.
If we want to test this one we can look at measures of investors’ expectations of inflation. On January 31, just before the plunge, the yield on 10-year Treasury bonds was 2.72 percent. The yield on an inflation-indexed 10-year bond was 0.61 percent, implying a gap of 2.11 percentage points. On Friday, the day of the first big plunge, the yield on the 10-year Treasury bond rose to 2.84 percent, while the yield on the inflation-indexed bond rose to 0.7 percent, giving a gap of 2.14 percentage points.
That’s 0.03 percentage points more than before the crash. Do we really want to say that an increase in the expected rate of inflation of 0.03 percentage points will sink the market? Of course, the gap was back down to 2.10 percentage points at the end of the day on Monday, so it’s not clear what happened to investors’ fears that the Trump tax cuts would spur inflation.
Okay, we get that Sorkin is apparently very fearful of inflation and presumably thinks the Fed has to be very vigilant on the inflation watch. He doesn’t even care if he lacks the evidence to make his case.
(It is worth noting that if the Trump tax cuts “work” it is supposed to be by spurring a flood of new investment. That should increase productivity growth, which would relieve inflationary pressures. So if Sorkin has a vision of Trump’s tax cuts causing inflation, he seems them “working” in a different way than has been advertised.)
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My modest additions to five paragraphs of the NYT article on the budget deal:
“The deal would raise the spending caps by about $300 billion over two years (3.5 percent of projected spending), according to a congressional aide. The limit on military spending would be increased by $80 billion in the current fiscal year (2.0 percent of spending) and $85 billion in the next year (1.9 percent of spending), which begins Oct. 1, the aide said. The limit on nondefense spending would increase by $63 billion this year (1.5 percent of spending) and $68 billion next year (1.6 percent of spending).
The deal will cause federal budget deficits to grow even larger, on top of the effects of the sweeping tax overhaul that lawmakers approved in December. But because the agreement gives both parties what they wanted most, the deficit impact appears to be of little concern. Defense Secretary Jim Mattis, White House Press Secretary Sarah Huckabee Sanders and Speaker Paul D. Ryan all quickly embraced it.
From the increase in domestic spending, Mr. Schumer said the deal includes $20 billion for infrastructure (0.2 percent of spending [all calculations assume a two-year figure]), $6 billion for the opioid crisis and mental health (0.07 percent of spending), $5.8 billion for child care (0.07 percent of spending) and $4 billion for Veterans Affairs hospitals and clinics (0.05 percent of spending). It also includes disaster relief for areas hit by last year’s hurricanes and wildfires.
The deal also includes $4.9 billion — two years of full federal funding — for Medicaid in Puerto Rico and the United States Virgin Islands (0.06 percent of spending), helping to avoid a looming Medicaid shortfall. There is additional money to repair infrastructure, hospital and community health centers severely damaged by Hurricanes Irma and Maria.
The relief aid also includes $28 billion in community development block grants (0.33 percent of spending), including $11 billion for Puerto Rico (0.13 percent of spending), with $2 billion of that going to repair the power grid (0.02 percent of spending). About 30 percent of Puerto Ricans — more than 400,000 customers — still don’t have electricity more than four months after Hurricane Maria. Puerto Rico requested $94.4 billion in aid after the storm.”
My modest additions to five paragraphs of the NYT article on the budget deal:
“The deal would raise the spending caps by about $300 billion over two years (3.5 percent of projected spending), according to a congressional aide. The limit on military spending would be increased by $80 billion in the current fiscal year (2.0 percent of spending) and $85 billion in the next year (1.9 percent of spending), which begins Oct. 1, the aide said. The limit on nondefense spending would increase by $63 billion this year (1.5 percent of spending) and $68 billion next year (1.6 percent of spending).
The deal will cause federal budget deficits to grow even larger, on top of the effects of the sweeping tax overhaul that lawmakers approved in December. But because the agreement gives both parties what they wanted most, the deficit impact appears to be of little concern. Defense Secretary Jim Mattis, White House Press Secretary Sarah Huckabee Sanders and Speaker Paul D. Ryan all quickly embraced it.
From the increase in domestic spending, Mr. Schumer said the deal includes $20 billion for infrastructure (0.2 percent of spending [all calculations assume a two-year figure]), $6 billion for the opioid crisis and mental health (0.07 percent of spending), $5.8 billion for child care (0.07 percent of spending) and $4 billion for Veterans Affairs hospitals and clinics (0.05 percent of spending). It also includes disaster relief for areas hit by last year’s hurricanes and wildfires.
The deal also includes $4.9 billion — two years of full federal funding — for Medicaid in Puerto Rico and the United States Virgin Islands (0.06 percent of spending), helping to avoid a looming Medicaid shortfall. There is additional money to repair infrastructure, hospital and community health centers severely damaged by Hurricanes Irma and Maria.
The relief aid also includes $28 billion in community development block grants (0.33 percent of spending), including $11 billion for Puerto Rico (0.13 percent of spending), with $2 billion of that going to repair the power grid (0.02 percent of spending). About 30 percent of Puerto Ricans — more than 400,000 customers — still don’t have electricity more than four months after Hurricane Maria. Puerto Rico requested $94.4 billion in aid after the storm.”
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Before anyone starts jumping off buildings, let me give you a few items to think about.
1) The stock market is not the economy. It moves in mysterious ways that often have little or nothing to do with the economy. In October of 1987, it plunged more than 20 percent in a single day. GDP grew 4.2 percent in 1988 and 3.7 percent in 1989. The market did recover much of its value over this period, but we don’t know whether or not it will recover the ground lost in the last week either.
2) The market has gone through an enormous run-up over the last nine years. The current level is more than 230 percent above its 2009 lows. That translates into an average nominal return of more than 14.0 percent annually, before taking into account dividends.
The gains have been even more rapid over the last two years. Even with the recent drop, the market is more than 40 percent above its February 2016 level. Most people would have considered it crazy to predict the market would rise by 40 percent over the next two years back in February 2016. In other words, people who have invested heavily in the stock market have nothing to complain about. If they didn’t understand that it doesn’t always go up then they should keep their money in a savings account or certificates of deposit.
3) This plunge is not in any obvious way linked to higher interest rates. We can say that because interest rates have not risen that much. The yield on 10-year Treasury bonds stands at 2.71 percent. (It fell sharply today as the market was plunging.) That compares to about 2.4 percent a year ago. It’s pretty hard to tell a story that a 0.3 percentage point rise in long-term interest rates will sink the stock market and the economy. The yield had been less than 1.8 percent two years ago.
4) The plunge in markets is worldwide with markets in Europe and Asia also sinking sharply. This undercuts the blame Trump story unless the theory is that Trump is so bad he is going to sink the whole world economy. Also, the markets are still above the levels they were at when Trump took office, so this is really not a good theory for Trump critics to embrace.
In short, calm down. The economy is not going to collapse. If you have less money in your 401(k) than you did last week, just remember: you have far more than you expected to have last year.
Before anyone starts jumping off buildings, let me give you a few items to think about.
1) The stock market is not the economy. It moves in mysterious ways that often have little or nothing to do with the economy. In October of 1987, it plunged more than 20 percent in a single day. GDP grew 4.2 percent in 1988 and 3.7 percent in 1989. The market did recover much of its value over this period, but we don’t know whether or not it will recover the ground lost in the last week either.
2) The market has gone through an enormous run-up over the last nine years. The current level is more than 230 percent above its 2009 lows. That translates into an average nominal return of more than 14.0 percent annually, before taking into account dividends.
The gains have been even more rapid over the last two years. Even with the recent drop, the market is more than 40 percent above its February 2016 level. Most people would have considered it crazy to predict the market would rise by 40 percent over the next two years back in February 2016. In other words, people who have invested heavily in the stock market have nothing to complain about. If they didn’t understand that it doesn’t always go up then they should keep their money in a savings account or certificates of deposit.
3) This plunge is not in any obvious way linked to higher interest rates. We can say that because interest rates have not risen that much. The yield on 10-year Treasury bonds stands at 2.71 percent. (It fell sharply today as the market was plunging.) That compares to about 2.4 percent a year ago. It’s pretty hard to tell a story that a 0.3 percentage point rise in long-term interest rates will sink the stock market and the economy. The yield had been less than 1.8 percent two years ago.
4) The plunge in markets is worldwide with markets in Europe and Asia also sinking sharply. This undercuts the blame Trump story unless the theory is that Trump is so bad he is going to sink the whole world economy. Also, the markets are still above the levels they were at when Trump took office, so this is really not a good theory for Trump critics to embrace.
In short, calm down. The economy is not going to collapse. If you have less money in your 401(k) than you did last week, just remember: you have far more than you expected to have last year.
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The NYT had a very good piece pointing out that the bonuses promised by many corporations following the tax cut are often less consequential than they appear. For example, many companies highlighted their maximum bonus amount. This was often a figure (e.g. $1,000) that went to a full-time worker who had been with the company for twenty years or more. At a company like Walmart, very few of their workers would have been there for twenty years and many are part-time. This means that the typical worker would receive much less than the hyped $1,000 bonus.
However, the most remarkable aspect of the bonus game is the fact that a bonus could be tax deductible in 2017 even if it was not paid until 2018. This inexplicable (on policy grounds) quirk in the tax code gave corporate America an enormous incentive to announce bonuses at the end of last year since bonuses announced in 2017 cost much less money than bonuses or pay increases announced and paid in 2018.
If a company like Walmart or AT&T gave its workers $100 million in bonuses or pay increases in 2018 it would cost the company $79 million in after-tax profits, given the new 21 percent corporate tax rate. However, if the same $100 million bonus was announced before the end of 2017 it would only cost the company $65 million in after-tax profits since it could be deducted in a year when the tax rate was 35 percent. (These calculations assume that the companies actually pay the marginal tax rate.)
This means, in effect, that the government would have been paying these companies $14 million to announce a bonus before the end of the year. Since we all believe that companies respond to incentives, it should not be surprising that many announced bonuses before the end of 2017.
The NYT had a very good piece pointing out that the bonuses promised by many corporations following the tax cut are often less consequential than they appear. For example, many companies highlighted their maximum bonus amount. This was often a figure (e.g. $1,000) that went to a full-time worker who had been with the company for twenty years or more. At a company like Walmart, very few of their workers would have been there for twenty years and many are part-time. This means that the typical worker would receive much less than the hyped $1,000 bonus.
However, the most remarkable aspect of the bonus game is the fact that a bonus could be tax deductible in 2017 even if it was not paid until 2018. This inexplicable (on policy grounds) quirk in the tax code gave corporate America an enormous incentive to announce bonuses at the end of last year since bonuses announced in 2017 cost much less money than bonuses or pay increases announced and paid in 2018.
If a company like Walmart or AT&T gave its workers $100 million in bonuses or pay increases in 2018 it would cost the company $79 million in after-tax profits, given the new 21 percent corporate tax rate. However, if the same $100 million bonus was announced before the end of 2017 it would only cost the company $65 million in after-tax profits since it could be deducted in a year when the tax rate was 35 percent. (These calculations assume that the companies actually pay the marginal tax rate.)
This means, in effect, that the government would have been paying these companies $14 million to announce a bonus before the end of the year. Since we all believe that companies respond to incentives, it should not be surprising that many announced bonuses before the end of 2017.
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